Wednesday, 14 December 2016

I have just had a quick look at the latest official UK monthly Jobs Report,
mostly containing data for the three months August to October 2016, published earlier today by
the Office for National Statistics (ONS).

The UK labour market finally appears to be suffering
a bout of post-Brexit vote blues which is now hitting recruitment. The number
of people employed in the private sector has fallen by 17,000 and vacancies have
leveled off, though an offsetting rise of 12,000 in public sector employment
(mostly in education and the NHS) has limited the fall in both the overall job
total and the employment rate, which is down a tick at 74.4%.

Despite this headline unemployment is down
16,000 to 1.616 million (a rate of 4.8%) on the quarter but only because the jobs slowdown is disguised by a
sharp rise of 76,000 in the number of people out of work who are economically
inactive. This masking effect of inactivity is particularly noticeable in the
youth labour market, disguising a fall of 33,000 in the number of 18-24 year
olds in work. The bad news on jobs is alleviated by a pick-up in the nominal rate
of growth of average weekly earnings for people in work (now up to 2.6%
excluding bonuses) albeit the real benefit of this is to some extent being
offset by higher consumer price inflation. Whether one looks at jobs or real
pay growth, therefore, the UK labour market looks to have entered a somewhat
slower time.

Wednesday, 16 November 2016

The UK Office for National Statistics (ONS) has just published its latest monthly update on the labour market with data mostly covering the quarter July to September. The initial observation is another month and still no obvious sign of
Brexit in the official labour market numbers. Employment is up 49,000 on the
quarter with a further fall in unemployment of 37,000 cutting the headline
jobless rate to 4.8%. Job vacancies are also up while redundancies have held
steady. The only possible sign of a
cooling in the market is a somewhat slower pace of job creation and a quarterly
rise of 49,000 in the number of economically inactive people which has meant a
relatively small increase in jobs could still reduce unemployment, albeit the
ONS finds no evidence of any post Brexit vote fall in migrant workers. As a
result the UK labour market continues to tighten, giving a boost to pay growth
(average weekly earnings are now growing at an annual rate of 2.4% excluding bonuses) even though the ONS estimates that the
rate of growth of hourly labour productivity dipped from 0.6% to 0.2% between
the second and third quarter of the year. Overall therefore the labour market
looks to be in pretty good shape and there is nothing to indicate that Brexit
uncertainty has hit hiring or resulted in greater firing. However, with Brexit
unlikely to aid productivity growth in the short run at a time when higher
price inflation is also in the pipeline even a strong labour market may
struggle to deliver sustained real wage improvements for most UK workers.”

Wednesday, 19 October 2016

The UK Office for National Statistics has just released the latest official jobs report, mostly covering the three months June to August 2016

There has been a small quarterly rise of 10,000 in the headline level of unemployment. This is disappointing news but should not be viewed as a ‘canary
in the coalmine’ for any future adverse effect of the Brexit vote. Brexit may
yet lead to a weaker jobs market but these latest figures are generally still
very strong.

The number of people in work increased by 106,000 in the quarter
while vacancies remained fairly steady. Unemployment only increased because of
a 116,000 quarterly increase in the supply of labour; the unemployment rate in
fact remained unchanged at 4.9%.

On the downside there has been a slight
increase of 15,000 in the level of redundancies, but this will include continued public sector
downsizing as well as any early confidence effect of the Brexit vote. Meanwhile
the rate of growth in average weekly earnings excluding bonuses ticked up a bit
to 2.3%, another positive sign albeit the faster pace of consumer price inflation is
now dampening growth in real pay.

Friday, 22 July 2016

All political careers, it's often said, end in failure. But this never stops departing politicians from putting a gloss on their own professional obituaries.

When earlier this week the Office for National Statistics (ONS) published strong headline figures for the UK employment rate (which in the March-May quarter reached yet another record high of 74.4%), the unemployment rate (down to an 11 year low of 4.9%) and the economically inactive rate (now at a record low of 21.6% for people of working age) former Chancellor of the Exchequer George Osborne was quick to draw attention to the 2.5 million net jobs created during his six year stint at HM Treasury. Yet while Mr Osborne is fully entitled to highlight why many economists, myself included, underestimated the speed and strength of private sector job growth since 2010, I'm not sure he can, or maybe even should, take much credit for this.

The so-called 'jobs miracle' of recent years is attributable to the cumulative effect of a combination of supply side measures introduced over three decades by successive Conservative and Labour Governments, which Mr Osborne inherited. These range from employment deregulation to active welfare to work measures and a largely open door attitude to immigration. UK employment policy has over time succeeded in pushing an ever greater supply of labour into the market and ensured that that supply is translated into employment. This occurs either through workers pricing themselves into jobs or becoming self-employed, or by employers creating jobs to make use of the abundance of labour available.

The UK labour market mechanism thus operates on the basis of a kind of pseudo Say's Law whereby labour supply serves to create its own labour demand. However, while this will always tend to propel the economy toward full employment, in the absence of sufficient aggregate demand for goods and services it does so by making the economy more labour intensive, thereby depressing growth in productivity and real wages. The result is full-employment but of a kind far different from that we once aspired to.

What does this mean for how we should view Mr Osborne's jobs record? It's not entirely clear what if any supply side policy changes Mr Osborne, or indeed the governments in which he served, made to improving the functioning of the labour market. My conclusion is that the jobs growth we have seen is entirely due to policy measures which pre-dated his tenure in office. What Mr Osborne did of course preside over was 6 years of steady, albeit slower than expected, fiscal consolidation - the policy his critics call 'the economics of austerity'. How successful the former Chancellor was at that is for historians to determine but one can say that in dampening aggregate demand in the economy he served to take us on a low-productivity, low real wage growth, path to full-employment. We could, and should, have done better.

Tuesday, 12 July 2016

Earlier today I participated in a plenary panel session of
the Learning & Work Institute’s IntoWork Convention 2016 on the broad subject
of what Brexit might mean for the UK labour market and employment policy. Here
is a write-up of the issues considered during my brief opening comments:

I broke my ankle a month or so before the EU Referendum
vote.

The experience provides a suitable metaphor for Brexit –
initial pain and trauma followed by a prolonged period of hobbling along at
slower than usual pace plus considerable uncertainty about whether in due
course things will ever again be as good as if the break hadn’t happened.

Translated into economic jargon, Brexit is a supply side
shock to the economy with probable negative short-term to medium term demand
side effects on output and at present indeterminate but probably negative effects
on the potential long-term growth rate.

The
short-term – recession and higher unemployment

Looking first at the initial trauma, there is a fair
amount of consensus about the nature if not the exact magnitude of the short-run
economic impact. The initial source of pain is due to a combination of uncertainty
about the future and the associated adverse effect this has on both business
and consumer confidence. Lack of confidence in turn affects willingness to hold
sterling and is also likely to cause borrowing costs to rise if lenders impose
higher risk premiums on loans.

The value of the £ has already suffered a sharp drop,
providing a stimulus to exports but at the same time set to raise import prices
which will eventually hit real household incomes with knock-on effects to
consumer spending.

Alongside this there will at best be a temporary pause in
business investment while businesses assess the progress and type of post-Brexit
institutional arrangements and trade deals negotiated with the EU and other
countries.

It is probable that the combined negative effects on
domestic demand will to some extent be offset by various forms of stimulatory
policy action by the Bank of England. But monetary policy is a blunt instrument
at times when economic confidence is low and might therefore need to be supported
by active fiscal policy intervention of a kind eschewed during the era of
austerity and ‘small government’ ideology that has prevailed since 2010.

The Government has already wisely abandoned the idea of introducing
a contractionary emergency budget of spending cuts and tax hikes and accepted that
it will now take longer than previously intended to eliminate the fiscal
deficit. Whoever is Chancellor of the Exchequer in the incoming May administration
should be wiser still and open to introducing an expansionary budget of tax
cuts and higher targeted public investment once the Office for Budget
Responsibility has had an opportunity to assess the economic and fiscal outlook
in the immediate aftermath of Brexit.

Nonetheless, even with suitable policy interventions, a
sharp slowdown in short-term economic growth is widely thought to be
inevitable, with many economists, myself included, expecting this to include a
period of outright recession – i.e. at least two successive quarters of falling
output – at some point in the next 12 to 18 months.

However, although Brexit amounts to a significant shock
to the UK economy (with compounding knock-on effects to the EU and wider global
economy) the consensus view expects the effect of this ‘home grown’ Brexit
economic downturn to only be around a third as severe as that caused by the global
financial crisis in 2008/9.

As for the short-run impact on the labour market, a crucial
factor will be the effect of Brexit on employer psychology, which might
exaggerate negative short-run decision making on hiring and firing.

Official data already show some sign of a slowdown in
hiring activity in the run-up to the referendum debate, with further
independent evidence suggesting a substantial drop in hiring activity
immediately following the vote to leave.

But despite limited initial reports of employers shifting
either work or staff from the UK to other EU locations, there is nothing as yet
to suggest employers are cutting jobs albeit it is far too early to be sanguine
about this.

Some may recall the aftermath of the £’s ejection from
the European Exchange Rate Mechanism in autumn 1992. Although this in fact provided
a welcome stimulus to the economy, it initially triggered the biggest ever
single quarterly shake-out of jobs since World War II, greater than anything
that occurred in the recessions of the early 1980s, at the start of 1990, or
the end of the 2000s. Such a response is not beyond the realm of possibility in
the next six months.

In this respect, of course, optimists will take comfort
from what happened following the financial crisis of 2008 which saw the fall in
demand for labour diffused between a rise in unemployment, falling or stable
nominal wages compounding the effect of higher price inflation on real wages,
plus increased underemployment and a shift towards insecure work for employees
and self-employed.

As a result, while the degree of economic pain inflicted
on the UK workforce proved as great as economist’s expected, unemployment
peaked at a lower than expected rate, limiting the amount of psychological pain
experienced.

Yet it is perhaps naïve to expect such a relatively
benign outcome for jobs in any post-Brexit recession since some of the parameters
of employer decision making have changed in more recent years.

For example, the Coalition Government substantially relaxed
the law on unfair dismissal, this decision by former Business Secretary Sir
Vince Cable now making it easier and cheaper for employers to fire staff during
economic downturns.

Similarly, the weakness of productivity growth in the
past decade shows that the economy is to some extent ‘overstaffed’ and
potentially vulnerable to a swift bout of restructuring and downsizing.

Moreover, the climate of wage setting may prove different
in a post-Brexit recession, with significantly more workers protected by the
National Living Wage – which puts a limit on downward wage flexibility – and
others perhaps less than willing to undergo a further prolonged period of
voluntary wage restraint.

Overall, therefore my expectation is that the post-Brexit
recession, while less severe than the 2008/9 recession, will be proportionately
less job friendly, pushing the aggregate level of unemployment back above 2
million within the next 2-3 years.

The
long-term – slower real wage growth

It should be stressed that a rise in unemployment of
around 0.5 million would be far from catastrophic when viewed in UK historical
perspective, thus making it more than manageable in policy terms, albeit it
will be important for those with influence over such matters to press the case
for immediate additional investment in both Jobcentre Plus services and welfare
to work programmes.

Assuming programme expenditure is sufficient to prevent a
rise in long-duration unemployment, the labour market will over time adjust to
reduce unemployment to the pre-Brexit rate. In other words, Brexit will not
lead to a permanently higher rate of structural unemployment.

However, it is virtually impossible to assess how long
the adjustment will take, or at present to judge what the job structure and
sustainable level of real wages might look like once the post-Brexit economy
has returned to full employment.

The crucial and as yet unknown factors in this respect are
what post-Brexit trade arrangements will mean for investment, immigration and employment
regulation.

The consensus view of economists at present points either
toward an unfavourable form of Brexit arrangement in terms of access to the EU
single market which lowers the overall volume of trade and investment - dampening
long-term growth in productivity and real wages – or a favourable form of
Brexit arrangement but one that has little impact on immigration, which while
beneficial on average to productivity might also have a dampening effect on
growth in real wages for less skilled workers.

The type of Brexit arrangement secured will also
determine the extent to which the UK is free to set its own regime of
employment regulation.

Given that the UK labour market is already lightly
regulated by the standard of developed economies it seems unlikely that even an
extreme right wing government with free rein would gain popular support for a widespread
bonfire of employment rights, although some watering down of regulations on
matters such as working time and the rights of temporary agency workers might
be feasible. Action on the latter could serve to lower the UK’s rate of
structural unemployment post-Brexit but at the risk of further entrenching
forms of employment practice that already foster a large segment of low-productivity,
low wage and insecure jobs.

Making
the best of a bad break

Views clearly differ on the efficacy of Brexit. It is
possible that the overwhelming majority of economists who worry about the short
and long-term consequences are wrong and that the future for the UK outside the
EU will be one of even greater prosperity.

For the time being, however, I remain firmly on the side
of the pessimists and expect Brexit to heighten the pain of unemployment in the
next few years and from then on limit the improvement in living standards that would
otherwise have been achieved.

A sensible policy response will help ease the pain of
adjustment and help us to cope as best as possible with future challenges, but
this will nonetheless amount to making the best of a bad (and sadly
self-inflicted) break.

Thursday, 17 March 2016

The UK’s very poor
recent trend productivity performance features prominently in debate following
yesterday’s Budget, with pessimism over prospects for improvement a key reason for
downward revisions to GDP growth forecasts. The so-called ‘productivity puzzle’
continues to exercise the minds of economists and has yet to solved. But some
insights might be gleaned from figures just released by the Office for National
Statistics (ONS) estimating the extent of skills mismatch in the UK labour
market i.e. the proportion of people either overeducated or undereducated for
the jobs they are doing.

The ONS has looked
at how well the level of educational attainment of people in work matches with
the average educational attainment of the occupation they are employed in. Mismatch
is an indicator of how efficiently labour is allocated within the economy,
which will in turn affect productivity since people will perform best in jobs suited
to their skills.

By the end of 2015
just over two thirds (68.7%) of people of working age (16-64) were considered
matched to their employment. Of the remainder who were mismatched (ostensibly ‘in
the wrong job’) 16.1% were overeducated and 15.1% undereducated.

Over time (the ONS
look at the period Q2 2002 to Q4 2015) the match rate has generally been on
upward trend but found to fluctuate. The rate peaked prior to the recession, fell
during the recession, recovered to just above the pre-recession peak by the end
of 2012, and then fell again to the end of 2015 figure of 68.7%. In other
words, mismatch was on the increase during much of the jobs boom of recent
years, which we also know was a time of generally poor growth in labour
productivity. Moreover, while by the end of 2015 the under-education rate was
around 1.5 percentage points below the pre-recession high the over-education rate
was around 2 percentage points above the pre-recession low.

Put together, these
figures show that while the UK labour market serves to match the vast majority
of people to the ‘right job’ in terms of their education the dominant trend is that
toward a higher rate of over-education. This is worrying and suggests the UK is
underusing an increasing proportion of available talent, with women and people
in part-time jobs in particular employed in occupations for which they are
overeducated. When one acknowledges waste of available talent on this scale it’s
no wonder UK productivity performance is struggling to improve.

Be clear, however.
The response to over-education should be intensified policy efforts to increase
demand for skills and promote better quality jobs. The response should not be
to cut the supply of high level skills to the labour market, for example as
advocated by commentators who think the UK is nowadays producing ‘too many
graduates.’ A high productivity economy needs both better jobs and more highly educated
workers.

Wednesday, 16 March 2016

It’s
Budget day in the UK so less focus than usual on the latest official labour
market numbers published earlier this morning by the Office for National
Statistics (mostly covering the three months to January 2016). Good news on jobs
will doubtless get at least a passing reference from Chancellor George Osborne
in his statement to the House of Commons, helping to offset what’s likely to be
somewhat less upbeat news from the Office for Budget Responsibility on the
overall economic and fiscal outlook. However, the Chancellor would be advised
to highlight the general trend of the jobs market over the past year rather
than dwell on the most recent figures.

While the UK
labour market remains healthy the pace of the jobs recovery has slowed a little
with both the latest rise in employment (up 116,000) and the fall in
unemployment (down 28,000) smaller than in recent quarters. Moreover, the
number of job vacancies has also dipped slightly (down 10,000 to 768,000 in the
three months to February 2016) and although the rate of growth of regular average
weekly earnings has picked up from 2% to 2.2% in nominal terms real average
weekly earnings growth is little changed at 2% (up from 1.9%). Taken together
these figures could indicate that employers are becoming more cautious over hiring
decisions as they approach what will be a ‘quarter of uncertainty’ for the economy,
including the introduction of the National Living Wage at the start of April
and the EU referendum toward the end of June.

Wednesday, 17 February 2016

Economic growth may have slowed in the final quarter of last year but,
as the Office for National Statistics informed us earlier today, this didn’t prevent a further big quarterly
rise in employment of 205,000 (0.7%), almost all full time, split roughly
equally between employees and self-employed people. This helped keep the
unemployment rate steady at 5.1% - the number of jobless people actively
seeking work fell by 60,000 but 88,000 previously economically inactive people of
working age entered the labour market while the overall economically active
population (aka the total labour supply, including people above working age and
migrants) increased by 145,000.

Despite the good news on jobs the juxtaposition of another record
setting quarter for the working age employment rate (which has now reached 74.1%)
and somewhat softer economic growth suggests deterioration in the UK’s already
dire underlying labour productivity performance (though we won’t have figures
to confirm this until later in the year).. This, along with strong growth in
the active labour supply enabling employers to fill most job vacancies without
too much difficulty, helps explain why average weekly earnings excluding
bonuses are still rising at an annual rate of only 2%.

For the time being low consumer price inflation is protecting workers
from the consequences of weakness in UK productivity and pay. But we face a
rude awakening on jobs and real living standards once the price level starts accelerating
at a more normal pace (i,e, moves back toward the Bank of England’s target rate
of 2% CPI inflation) and/or if economic growth slows more sharply than
forecasters at present expect.

Wednesday, 20 January 2016

We’ve just had the
latest official UK jobs market figures from the Office for National Statistics.
This is the first set of 2016, though the data mostly cover the three months September
to November of last year. And the picture is broadly in line with the recent
trend.

Employment continues
to very grow strongly, with 267,000 (+0.9%) more people in work compared with
the previous quarter. Employees account for 60% of the latest quarterly
increase, full-time employees for 42%. The overall rise takes the total number
of people in work to 31.39 million, lifting the working age employment rate to
74%, higher than at any time since comparable records began in 1971. Unemployment
meanwhile is down 99,000 on the previous quarter, to 1.675 million, alongside a
fall of 93,000 (to 8.92 million) in the number of economically inactive people of
working age.

The unemployment
rate (5.1%) is now lower than at any time for a decade but still not triggering
higher wage pressure. Indeed the rate of annual nominal pay growth has slowed
again (down to 1.9% excluding bonuses, which is the best measure of underlying
pay pressure). This suggests that the rate of unemployment consistent with the Bank
of England’s 2% inflation target has fallen significantly over time; a generation
ago most economists reckoned this so-called sustainable unemployment rate was
around 10%. Consequently we need to rethink what we mean by a ‘tight labour
market’.

Some commentators continue
to talk as if the labour market is already very tight, citing indicators such
as unfilled job vacancies (currently standing at around 750,000) and employers’
reports of mounting skills shortages. The implication is that the Bank of England
ought to be considering raising interest rates sooner rather than later, notwithstanding
caution induced by the state of the global economy as highlighted only
yesterday by the Bank’s at present dovish Governor Mark Carney. But the pay
data simply don’t support a hawkish view. Unemployment may now have to fall to
a very low rate, perhaps below 4%, before we see strong upward pressure on pay.
For the time being the labour market isn’t tight, just recovering. Monetary
policy should support this not stymie it.